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An influential group of MPs has said Nest, the UK's new public pension scheme, should not be restricted in competing with the private sector - provoking dismay from pensions providers such as Legal & General.

The Work and Pensions Select Committee, a group of 11 backbench MPs that reviews the work of the government's Department for Work and Pensions, released a report looking at this year's far-reaching pensions reforms this morning.

From October, all companies in the UK will be obliged to offer workers a pension, in a move aimed at automatically enrolling the 10m or so people who currently have no retirement savings. The obligation will fall on the largest companies first, this year, and then onto smaller employers in several waves over the years to 2017.

To comply with the new law, companies can sign up to the National Employment Savings Trust, a new public scheme that many expect to form the backbone of the new system.

However, Nest operates with two main restrictions. Workers can only contribute a maximum of £4,200 a year into it, and are banned from transferring their existing pension pots into Nest for purposes of consolidation.

Today's Select Committee report takes issue with these restrictions in forthright language. It says the government should remove them "as a matter of urgency", as they will prevent Nest from "addressing the market failure that it was designed to resolve."

One of the biggest concerns is employers who want, for simplicity's sake, to only run one pension fund. Because high-paid staff will effectively be excluded from Nest, companies are facing the prospect of signing up low-paid and transient workers to Nest and creating a separate, special scheme for senior employees.

Similarly, if workers cannot transfer their existing pots into Nest, this may put them off using it as well.

But in the run-up to the reforms' introduction, private providers, such as Friends Life, Legal & General and Standard Life, agreed that the lack of pensions for the low-paid was a case of 'market failure' but argued strongly that in correcting it, the government should not trample existing good pensions provision in the private sector.

Legal & General has continued to make this case today. In a statement, its pensions strategy director Adrian Boulding said: "These restrictions keep Nest tightly focused on the areas where the nation needs it. Removing the restrictions before the scheduled review in 2017 would risk Nest becoming distracted to the detriment of the very consumers it was created for.

The Confederation of British Industry made the same point, and argued that the scheduled review of Nest in 2017 was the right time to review the policy - not before.

But there was support elsewhere for the Select Committee's case. Ros Altmann, the pensions campaigner and director-general of the Saga Group, said the restrictions risked turning Nest into a scheme "with few members and only those nobody else wants."

She added this imperilled the taxpayer's chances of eventually recouping Nest's £100m set-up costs.

David Pitt-Watson, the former Hermes fund manager and Labour politician, also backed the committee, saying the restrictions on Nest "mean it provides a worse service, and is more costly to run."